Paul Krugman recently published an opinion piece in the NYT (original article here) and a good friend forwarded it to me. Below, find his article (in italics) and my responses.
The story so far: Bitcoin, the first and
biggest cryptocurrency, was introduced in 2009. It uses an encryption
key, similar to those used in hard-to-break codes — hence the “crypto” —
to establish chains of ownership in tokens that entitle their current
holders to … well, ownership of those tokens. And nowadays we use
Bitcoin to buy houses and cars, pay our bills, make business
investments, and more.
So far, right on!
Oh, wait. We
don’t do any of those things. Twelve years on, cryptocurrencies play
almost no role in normal economic activity. Almost the only time we hear
about them being used as a means of payment — as opposed to speculative
trading — is in association with illegal activity, like money
laundering or the Bitcoin ransom Colonial Pipeline paid to hackers who shut it down.
Wait! That doesn't sound correct at all. People have been buying houses, cars, paying bills, making business investments, and more, with bitcoin, for years already. For example, bitcars has been accepting bitcoin for cars since their launch in 2016. A significant portion of BMW dealerships have begun accepting bitcoin payments this year.
Twelve years is an eon in information technology time. Venmo,
which I can use to share restaurant bills, buy fresh fruit at sidewalk
kiosks, and much more, was also introduced in 2009. Apple unveiled its first-generation iPad in 2010. Zoom
came into use in 2012. By the time a technology gets as old as
cryptocurrency, we expect it either to have become part of the fabric of
everyday life or to have been given up as a nonstarter.
If normal, law-abiding people don’t use cryptocurrency, it’s not for
lack of effort on the part of crypto boosters. Many highly paid
person-hours have been spent trying to find the killer app, the thing
that will finally get the masses using Bitcoin, Ethereum or some other
brand daily.
Microsoft accepts bitcoin. Overstock (an amazon-like online retailer with a huge selection) has been accepting bitcoin for several years. While Amazon does not accept bitcoin directly (yet), for years you have been able to purchase anything they sell on Amazon, and pay with bitcoin, by using a service like Purse.io -- their escrow & matching service usually will allow you to get a discounted price, just for paying with bitcoin. AT&T accepts bitcoin. Etsy (ebay-like marketplace for home-made products) allows individual vendors to easily accept bitcoin. Shopify, a leading e-commerce platform with thousands of merchants, also allows any of their merchants to easily accept bitcoin. Bitcoin.travel allows travelers to book their trip and pay for flights, hotels, and other accommodations with bitcoin.
Rakuten, the largest Japanese online retailer, often called “the Amazon of Japan”, has recently added Bitcoin and other cryptocurrencies in their payment option. eGifter sells popular retailer gift cards for bitcoin, so if the place you want to shop doesn't accept it directly, they've been an option since their launch in 2013. There are lists all over the internet helping you find places that accept bitcoin as payment -- see a few hundred more here. Cheap Air is an American online travel agency, based in California, who accepts cryptocurrency as a payment method. Since 2013, CheapAir has processed crypto payments totalling more than $5,000,000.
Dozens of charities and nonprofits accept bitcoin for donations, including The Water Project, Internet Archive, Red Cross (since 2014!), Save the Children (since 2013!), United Way (since 2014).
For years, you've been able to order food from GrubHub or DoorDash and pay with bitcoin, and more recently, Uber Eats, Deliveroo, and Just Eat have all begun accepting bitcoin. This video shows a Subway shop accepting bitcoin as payment in November 2013 (around the same time that Romp Family Christmas Trees began accepting the payment method).
But I’ve been in numerous meetings with enthusiasts for cryptocurrency
and/or blockchain, the concept that underlies it. In such meetings I and
others always ask, as politely as we can: “What problem does this
technology solve? What does it do that other, much cheaper and
easier-to-use technologies can’t do just as well or better?” I still
haven’t heard a clear answer.
Krugman doesn't see the problem, but it's plain as day to every bitcoin enthusiast I've ever spoken with. Government having control of the issuance of currency (and issuing too much of it, devaluing it over time) is the problem. Bitcoin could undermine that system and replace it entirely. Even if it never reaches that full potential, already it is allowing citizens around the world to opt out of the forcible-taxation model and reclaim ownership and control over their finances, and enabling them to save money and create generational wealth that will not be subject to the blatant theft-in-broad-daylight of inflation.
In the USA, for example, the dollar has been "losing value" for years. I put "losing value" in quotes because the value isn't simply lost, it is stolen. The money in your pocket loses value when they issue more currency. It's a very sneaky theft, stealing right out of the pockets of every person who holds even a single US dollar. Right under our noses.
Yet investors continue to pay huge sums for digital tokens. The values of major cryptocurrencies fluctuate wildly — Bitcoin fell 30 percent Wednesday morning, then made up most of the losses that afternoon. Their collective value has, however, at times exceeded $2 trillion, more than half the value of all the intellectual property owned by U.S. business.
Why are people willing to pay large sums for assets that don’t seem to do anything? The answer, obviously, is that the prices of these assets keep going up, so that early investors made a lot of money, and their success keeps drawing in new investors.
Back in 2013 I wrote a long forum post on a bitcoin enthusiast forum, arguing that the fools with dollar signs in their eyes didn't see the true value of bitcoin. To this day, there are many of us that are buying bitcoin because we believe that it will replace all government issued currencies and become the primary system for holding and transferring value.
This may sound to you like a speculative bubble, or maybe a Ponzi scheme — and speculative bubbles are, in effect, natural Ponzi schemes. But could a Ponzi scheme really go on for this long? Actually, yes: Bernie Madoff ran his scam for almost two decades, and might have gone even longer if the financial crisis hadn’t intervened.
Did you see that chart above? The US dollar is the scam. Bitcoin is the solution. The financial crisis demonstrated that governments are not fit to manage economies set the stage for a replacement to the current paradigm.
Now, a long-running Ponzi scheme requires a narrative — and the narrative is where crypto really excels.
First, crypto boosters are very good at technobabble — using arcane terminology to convince themselves and others that they’re offering a revolutionary new technology, even though blockchain is actually pretty elderly by infotech standards and has yet to find any compelling uses.
Well, the compelling use is "to replace government issued currencies and prevent governments from surveilling and controlling all commerce and exchange."
Bitcoin solved the byzantine general's problem which had prevented every previous attempt at creating a replacement for government-issued currency. Bitcoin is a revolutionary new technology, for the first time ever allowing a decentralized consensus, which allows us a ledger of title that answers to nobody. Those words are clearly defined and are not technobabble.
Second, there’s a strong element of libertarian derp — assertions that fiat currencies, government-issued money without any tangible backing, will collapse any day now. True, Britain, whose currency was still standing last time I looked, went off the gold standard 90 years ago. But who’s counting?
I'm counting. Every government-issued currency in history has a chart similar to the one shown above for the US dollar. You can see the one for the GBP here. It's not that they "will collapse any day now," rather it's that they have been steadily losing value since their creation and will likely continue to do so.
Purchasing power of the GBP from 1900 to present (source):
Given all this, are cryptocurrencies headed for a crash sometime soon? Not necessarily. One fact that gives even crypto skeptics like me pause is the durability of gold as a highly valued asset. Gold, after all, suffers from pretty much the same problems as Bitcoin. People may think of it as money, but it lacks any attributes of a useful currency: You can’t actually use it to make transactions — try buying a new car with gold ingots — and its purchasing power has been extremely unstable.
Gold and bitcoin are very similar, but, as Krugman says, try buying a new car with gold ingots. Also, compare bitcoin to gold on any of the various attributes that make for "sound money" -- the properties that a currency has that make it useful as money -- and bitcoin wins. It's a lot easier to transfer, it's a lot easier to store, it's a lot harder to counterfeit. Scarcity? Nobody knows how much gold there is still left in the earth to be found tomorrow, but we can easily know with certainty precisely how many bitcoin currently exist and how many will exist on a specific date in the future.
Try sending $90,000 of gold from here to to your friend in South Africa. The transfer would only cost around $20 and take around 15 minutes, with bitcoin. Compare that with shipping costs for gold (which is both heavy and requires armored transport vehicles) and bitcoin is the clear winner. But, if you try a similar transfer using modern methods like say, Western Union, you're also going to find bitcoin is the cheapest, fastest, safest way.
So when John Maynard Keynes called the gold standard a “barbarous relic” way back in 1924, he wasn’t wrong. But the metal’s mystique, and its valuation, live on. It’s conceivable that one or two cryptocurrencies will somehow achieve similar longevity.
Keynes is well known for his awful economic theory. The Keynesian economic policies currently in place in most of the countries in the world are "the problem" that we are trying to fix with bitcoin. Most bitcoin enthusiasts (or at least this one) believe that the Austrian school of economics, which contrasts sharply with the Keynesian theories, is grounded in reality and provides a strong foundation to build a sound economic system.
Or maybe not. For one thing, governments are well aware that cryptocurrencies are being used by bad actors, and may well crack down
in a way they never did on gold trading. Also, the proliferation of
cryptocurrencies may prevent any one of them from achieving the
semi-sacred status gold holds in some people’s minds.
If they could stop people from using bitcoin, they would have done so long ago. Bitcoin poses an existential threat to governments. As Erik Vorhees once said so well, "Instead of trying to change governments with a useless vote, or pathetic pleading, we merely abandon the government's powerbase - the power derived from control of exchange and currency."
The
good news is that none of this matters very much. Because Bitcoin and
its relatives haven’t managed to achieve any meaningful economic role,
what happens to their value is basically irrelevant to those of us not
playing the crypto game.
“In order to change an existing paradigm you do not struggle to try and change the problematic model. You create a new model and make the old one obsolete.” - Buckminster Fuller
One great thing about bitcoin is that it has "lifted itself up by the bootstraps" in a sense. The very people who are most enthusiastic about bitcoin and want to help realize a future where it has replaced government-issued currency and completely fills the role of "storing and exchanging value" worldwide, are the same people who would of course buy and hold bitcoin -- and doing so has taken many of them from poverty to comfort, or from middle class to wealthy. Those people have had their beliefs about the utility and future of bitcoin reinforced, as many take the price increase as an indication that other people, too, see value in bitcoin and believe it will succeed. With their newfound wealth, many of these people have reinvested in the bitcoin community and economy, building businesses that provide infrastructure (like kiosks where you can exchange your bitcoin for local currency) that help realize bitcoin's success.
The existing paradigm of government-issued currency and centralized control over exchange might be just fine for Krugman, but the new model of digital tokens on decentralized ledgers of consensus will make it obsolete, and for those of us that choose to use this new model, the benefits are already paying off.
